Analyst warns P3, general overcapacity could spark rate war

The effect of the mooted P3 alliance between liner carriers Maersk Line, Mediterranean Shipping Co., and CMA CGM could be more aggressive pricing behavior, according to Tan Hua Joo, executive consultant for Alphaliner.
Speaking Wednesday at the TPM Asia conference in Shenzhen, organized by the Journal of Commerce, Tan argued the alliance would have little impact on the industry’s competitive balance, countering an argument made that it would bring stability to rates and capacity.
“I disagree that the P3 will bring about more stability,” he said. “I believe it will drive further aggressive behavior from P3 and their competitors. It’s essentially an operational alliance, not cooperation on the sales side. How do you compete on service among similar operational aspects? To me, that’s a recipe for aggressive behavior.”
At the heart of the question about the purpose of the alliance and how it might affect the rest of the industry is an endemic oversupply issue that Tan said shows no signs of abating. He spoke at length about how the capacity overhang has become layered to a degree, which has never previously existed.
“The imbalance of supply demand now exists at various levels,” he said. “The additional layers of imbalance will prolong overcapacity well into 2016. Demand is essentially not growing as fast as supply, driving competition to build ever larger ships (to reduce per slot costs). An addditional level of imbalance is coming from the fact none of the major carriers have gone out of business. The absence of any exit and their access to capital markets drives more supply.”
Tan argued the improved slot costs of newer, larger vessels will only aggravate aggressive pricing behavior. One example of this is in the Asia-Europe trade, where carriers have actually managed capacity effectively. Capacity is down 2 percent from the start of 2013, according to Alphaliner.
But, the average size of vessel operating on the trade has grown from 8,400 TEUs in October 2011 to more than 10,000 TEUs in October 2013. Tan argues this gives carriers license to price more aggressively to win market share since their cost base is lower.
“That jump from 8,000 TEUs to 10,000 TEUs brings cost advantages, about $200 per TEU, but carriers have given that back to the market,” he said. “This has driven rate behavior. This is one element that could cause a rate war over the next few months.”
Tan said a reluctance to remove capacity in the Asia-Europe trade any further will likely prolong the problem.
“The sentiment among carriers is that each alliance has done its part and no one wants to take the next step,” he said. “I believe this will drive behavior over the next year. Carriers rely on skipped sailings but this is ineffective in preventing rate reductions.”
He pointed out that carriers pulled sailings on the Asia-Europe trade during Golden Week in October, “but it didn’t stop spot rates from falling.”
The P3 members, who plan on the alliance to become operational in the second quarter of 2014, are expected to submit filings to competition commissions in Europe, North America, and Asia in the coming weeks, with details about their proposed network to be released soon after, Maersk Line Chief Commercial Officer Steven Schueler said at the conference.